Where's the Dow headed from here?

Periodically, some investors, large and small, find it useful to take a step back and analyze the market using a variety of methodologies.

The 8,000 level has been breached. In fact, at this juncture, with the Dow in the 7,500-range, the 8,000-level looks like a distant memory.

For those investors who may not follow indices closely, the 8,000-level had psychological but not technical support -- the latter measures such things as the number of investors who are buying and selling, whether investors are committing new money to the market, and other factors.

Our old friend, Dow 8,000, has left

The battle between the bulls -- who argue that the worst news is behind us, and that government stimulus, fiscal and monetary, will both stabilize the financial system and get the U.S. economy moving again -- and the bears -- who argue the worst economic news stemming from the financial crisis is yet to come -- appears to have been won by the bears, by virtue of the breach of 8,000 and breaches of technical support at or near 7,800 and 7,600.

Support levels just ain't what they used to be

The Dow still has closing-low support at 7,552.29 and intra-day low support at 7,449.38, recorded in November 2008, and then psychological support at 7,000, but beyond that, technical support, from an investment standpoint, is not meaningful. For investors who were fully invested at 14,000, there's little comfort or tangible help provided by noting that the Dow has psychological support at 5,000.

Still, let's do a condensed, cross-methodology analysis to see if we can arrive at an informed investment conclusion regarding where the Dow is headed, near-term.

Technical Indicators: Bearish.

Fundamental Indicators: Bearish.

Monetary Policy: Bullish. Officials are doing everything they can to stimulate growth. The Fed will continue to use quantitative easing and other tactics to loosen credit markets and safeguard key institutions, both private and public. (A key institution is any institution whose failure would pose systemic risk.)

Fiscal Policy: Bullish. The $787 billion fiscal stimulus package has been passed. The Obama administration also announced a new $75 billion home mortgage refinance program that's likely to reduce the home foreclosure rate considerably. The U.S. Treasury Department is also expected to announce in a few days a plan to deal with the banking system's toxic assets -- assets that are at the heart of the financial crisis.

Credit Markets: Bearish. Recovering, but still strained, with still too much interbank distrust and fear. Not enough banks are providing credit to where it's needed: for commercial operations. Small businesses and consumers are having a hard time obtaining credit.

Market Analysis: The view from here argues that the outlook for U.S. stocks and the market is Bearish at least for the next three months, and most likely into Q3 2009. Factor in likely downward quarterly and 2009 earnings revisions, and things could get choppy, to say the least, for the U.S. stock market. It goes without saying that it remains solely a market for defensive stocks, and a few, isolated exceptions, with risk further mitigated by buying a position in stages (25% now, 25% in three months, etc.).

Still, even with those filters and safeguards, investors should keep in mind that a downdraft usually hurts all stocks, and given current economic conditions, stock positions remain vulnerable to a 20-30% haircut at any time.

Financial Editor Joseph Lazzaro is based in New York.
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